By Shares in Alibaba Group Holding Ltd. have been downgraded by analyst Robin Zhu from Bernstein, who warned that they may be a “value trap.” Despite noting that Alibaba shares are still “very cheap,” Zhu expressed concern that competitive issues and a tough marketing climate could make it challenging for them to appreciate in value. Zhu has cut his rating on the shares to market perform from outperform and lowered his price target on the American depositary receipts from $130 to $98.
Low Growth No Longer Feels Like an Aggressive Bear Case
Discussing last year’s upgrade of Alibaba, Zhu pointed out that it was based on the fact that the stock had discounted perpetual low growth, and that reopening would help support growth via better category mix. While acknowledging the potential for Alibaba to boost growth in gross merchandise volume during the June quarter, Zhu expressed concerns about the platform’s “anemic marketing spend intentions.” He noted feedback from Alibaba merchants indicated a greater inclination to spend on rival platforms PDD Holdings Inc. and Douyin. “Quarterly [comparisons] get harder from here, which we worry contributes to value-trap risk,” he concluded.
Alibaba’s Big Transition
As Alibaba undergoes a major transition, one analyst is hesitant about its potential for success. In a recent note to clients, Yiheng Zhu of Bernstein Research expressed his doubts about the company’s ability to maintain share price performance amidst the competitive problems in core e-commerce. He believes that low multiples and modest EPS accretion will not be enough to drive sustainable growth.
Despite this skepticism, Alibaba is forging ahead with its plans to spin off its cloud-computing business, with the hopes of unlocking shareholder value. The company also plans to shake up its leadership structure, but Zhu is uncertain how this will play out. As for the cloud spin-off, Zhu has recently lowered his target multiple for that part of the business. This is due to concerns about US sanction risk and private sector business sentiment. He also questions how many Alibaba shareholders will want to sell on day one.
Alibaba’s interest in spinning off Cainiao logistics and Freshippo grocery businesses has also been met with doubt from Zhu, who feels that investors won’t give much credit to these entities. While the company moves forward with its restructuring plans, only time will tell if it can overcome the challenges of the e-commerce market and continue to drive sustainable growth.
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